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Tuesday, August 03, 2021

Companies notice inflation

Pumping trillions of dollars into the stock market and the economy helped keep the nation afloat during that two-week shutdown that is now in its second year. But that short-term gain has a long-term pain.

Inflation is back.

As quarterly earnings reports for April, May, and June were released last month, Bank of America noticed mentions of inflation in those reports surged. The word suddenly was used 12 times as much as before. The sudden jump was noticeable after decades of inflation being under control.

Oh, earnings were good. Sure. Consumers have a lot of money to spend. But much of it was from transfer payments (especially government checks) and not earnings.

Zero Hedge reported, "What is more surprising is that in a quarter when many predicted margins would be hit by surging input costs, not only was that not the case but companies once again posted skyhigh margins, with 2Q net margins (ex-Financials) jumping to a new high at 13.0%, topping last quarter’s 12.5%. This was consistent with BofA's Corporate Misery Indicator, which rose to a record high (“least miserable”) in 2Q, indicating it was among the most favorable macro environment for corporate margins in history since 1978!"

Best since 1978.

That sounds good.

Inflation was 7.63% that year -- six times the 2020 rate.

But what happened after 1978 was the killer. Inflation hit double digits for the first time since World War II. 

Inflation was 11.25% in 1979, 13.55% in 1980, and 10.33% in 1981. 

The cure was painful.

CNBC recalled two years ago, "Paul Volcker’s greatest legacy as Fed chief was breaking inflation with shockingly high interest rates, but he turned the housing market into a nightmare for both buyers and sellers.

"Volcker allowed the fed funds rate, now topped out at 1.75%, to rise over 20%, and with it went the interest on home mortgages and everything else. The 30-year mortgage rate spiked into the high teens in late 1981 and continued at double digits until 1990."

Diane Swonk, chief economist at Grant Thornton, told CNBC, "People thought they’d never buy a home again, and they did.

"What was amazing was the back-to-back recessions of 1981 and 1982, which he used to break the back of inflation. ... He tightened policy, and brought the economy to its knees. He flipped the switch again, and the economy powered forward in a way it hasn’t since."

I and most of my readers lived through that nightmare 40 years ago.

Which brings us to 2021.

Savita Subramanian of Bank of America wrote, "We are starting to see the good inflation environment turning into a bad inflation environment with many companies citing accelerating cost inflation, particularly around wages."

Given the choice between receiving a government check to stay at home and play video games or getting up each day to work for $40,000 a year, surprisingly most people pick the former. 

In its story, Zero Hedge quoted some quarterly reports.

Amazon said, "The other thing is wage pressure has become evident. We've talked about this a bit. The wage increase that we normally would do in October we pulled forward into May. We're spending a lot of money on signing and incentives. And while we have very good staffing levels, it's not without cost. It's a very competitive labor market out there and certainly the biggest contributor to inflationary pressures that we're seeing in the business." 

By very competitive labor market, Amazon means peeling people from playing Tour of Duty.

Church & Dwight (a manufacturer) said, "We now expect full year gross margin to be down 75 basis points. This represents an incremental impact from our last guidance due to broad-based inflation on raw materials and transportation costs."

Illinois Tool Works said, "We continue to experience raw material cost increases, particularly in categories such as steel, resins and chemicals and now project raw material cost inflation at around 7% for the full year which is almost 5 percentage points higher than what we anticipated as the year began. And just for some perspective, this is roughly 2x what we experienced in the 2018 inflation/tariff cycle."

The inflation rate in 2018 was 2.49%.

That will be known as the good old days shortly.

CNBC advised readers and viewers on Monday, "You may want to rethink where you put your emergency cash amid rising inflation."

You may want to prepare your rainy day fund for a deluge.

But I ain't a financial expert.

17 comments:

  1. Wait'll they have to raise the interest rate. That also raises the credit card rates and the mortgage rates on a lot of loans. And splat goes the economy that only 3 years ago saw the lowest unemployment since the war and probably the lowest ever for Blacks. I'm wondering what they all think of this; for the first time they saw a light at the end of the tunnel and along came the Chinese and the Democrats and ran them over with a train.

    I'd be a bit pissed if I were them.

    ReplyDelete
    Replies
    1. What is just, if not even more, likely? The Democrats in power and the Federal Reserve allowing inflation to run out-of-control rather than timely increasing interest rates to prevent runaway inflation.

      Why do people think the USA is immune from hyper-inflation?

      We’re not.

      The USA Dollar is also not destined to be the World’s Reserve Currency forever.

      Stolen elections; a Constitution no longer followed or respected, a Nation that’s turned its back on its history and its ancestors; all of this portends badly for the future of America and its People.

      Rhapsodizing about how the current illegitimate Dementia Patient-in-Chief is QUOTE(!!!) one of the “best politicians in U.S. history” is simply the cherry on top of the cr@p sandwich of misery and insanity we are currently eating.

      Yum Yum Good.

      Delete
    2. Agree. How can we be the world's reserve currency if our elections are worse than 3rd world. It's all tied together... As planned

      Delete
  2. Joe Biden thinks he’s brought back the good old days. Little does Grandpa Senility realize, he’s lit the fuse on a bomb inside the Democratic Party. See ya Sleepy Joe and Heels up Harris.

    ReplyDelete
  3. The Elites continue to fund the vid game warriors through never-ending extensions of unemployment benefits due to the Fauci Flu. Left unchecked, they will make this “dignity wage” permanent and that will bankrupt the country even faster! Pray for a divine intervention and BUY MORE GUNS in the meantime.

    ReplyDelete
    Replies
    1. That seems to be coming to an end, however.

      Delete
  4. This is what I've been talking about regarding Trump and the stolen election. Now it's everybody's ox being gored. Now everybody is going to start caring who is President.

    And what was the title of the previous post?

    Oh, yes.

    Don't misunderestimate Biden.

    Indeed, indeed.

    ReplyDelete
  5. The Federal Reserve has been buying $120B in Federal Bonds per month for nearly a year. They do this with declared funds, a balance sheet they simply increase by fiat. This puts cash into the banking system and drives down the effective interest rate in the Bond market (rates move inversely to bond prices). More cash to loan + lower interest rates = the banking system has been creating money at a very fast clip, outpacing Americans' pace of production. The problem with buying securities with these funds is the funds represent no corresponding output. The Fed tried something similar in '09, but few wanted to take out a loan with a Marxist in the White House and a Socialist-controlled Congress, so the banking system did not create money as hoped. We had this figured out 100 years ago.

    ReplyDelete
  6. Companies not only notice inflation. Companies also notice which political party is in control and which political party is willing to do what it takes (both legally and illegally) to remain in power and control.

    Which is why most conservatives in the USA today have to keep their political opinions to themselves if they want to remain employed (or become employed) by America’s corporations and non-profits. I know this for a fact first-hand.

    “Don’t underestimate Biden” my big fat hairy smelly behind!!!!

    What we can’t “underestimate” is Democrats’ willingness to lie; steal; cheat; manufacture millions of phony votes; slander; corrupt the military and the intelligence agencies to convert them into enforcers of a one-party state, etc., etc., etc…

    Who in their right mind thinks Putin, Xi, the Iranian Mullahs, North Kora’s Kim, and their advisors go around saying — “we can’t ‘underestimate Biden’ because he is a literal political genius. A true master of war and diplomacy who looks at current events and sees at least seven moves into the future???”

    Are you insane???

    Here’s some advice. If you’re ever going to post nonsense like that again, do everyone else and especially yourself a favor and just post nothing. Take a break. Posting content regularly is less important than posting decent (not demonstrably false) content.

    What’s next, promoting the academic prowess of the current First Lady, her majesty the Doctor? And after that? A column supporting our brilliant and under appreciated hero, the man who has single-handedly saved more lives than anyone else before in human history…you know him…you love him…TONY FAUCI???

    Get a grip.

    ReplyDelete
    Replies
    1. I get goosebumps just thinking about that tooth drilling incident :(

      Delete
  7. In my house, 2018 is already “known as the good old days.”

    ReplyDelete
  8. I am praying for my financial advisor and his wise decisions.

    ReplyDelete
  9. Nice report. Like you used to get in old fashion newspapers and weekly magazines. One of the best reviews.
    Thanks

    ReplyDelete
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